Photo: gruntzooki on flickr
It’s one of the most shocking behavioural displays I’ve seen in my (now long) life. Market participants are wandering in a jungle ignoring all the warning sights and sounds.As a big believer in the rational-thought approach to events, I will be the first to admit to having underestimated the prevailing ship-of-fools operating mentality.
Blind governments, international institutions, outdated and corrupted experts, media, and the Western elite and their clones in different regions of the world all continue to lead the sheeple down the primrose path. The market will be driven by three knowable, on-the-scene drivers during the next month — and a Big Hammer. Here are the most-immediate, loudest and most dangerous sounds in the jungle.
1. Significant China slow down, led by its export sector [China Exporters Going Down]. This is well confirmed by the post-lunar holiday shipping data and commentary from leading Asian trading firms, as well as news reports out of China.
2. Supply chain disruptions to the “just in time” model of U.S. distribution. The causa proximas is the aforementioned China situation, Japanese spare parts and components issues, and the Arab Revolution’s impact on energy. This news item on radiation showing up in Japanese export shipments is a stunner.
I am using a proxy to gauge this supply chain effect, MIT’s product availability survey forJapan, which is currently down 17%. I think we can safely assume that if products are that short in Japan, they will definitely be so in the US and elsewhere outside of Japan. In the past, supplies from China, Japan and the Middle East have allowed U.S. inflationary pressures to be hidden or put on the back burner. That scenario is now acabado (finished).
3. An intensifying inflationary margin squeeze on businesses and corporations [Corporate Profitability Squeeze Bake In] and a global inflationary impact on gente (the people) and consumers. It has finally been showing up over the last month in surveys on inflation impacts and expectations. The University of Michigan survey showed one of the largest increases on record this month. This was also confirmed by Bloomberg’ consumer comfort and buying climate indexes, which worsened in the last month. The MIT survey shows a relentless surge in prices during the last three months. Now, we’re fully into a nasty operating environment.
Further proof may found in reports on corporate taxes collected by the Treasury, which have fizzled badly — the current quarter (through 3/24) was $35.75 billion versus YoY of $52.1 billion. By comparison, and to show just how rapidly this input-margin squeeze has materialised: 4Q 2010 registered a still-solid $60.04 billion, versus $56.58 billion YoY. I suspect employment layoffs are soon to follow. You can bet your bottom dollar that this will intensify the budgetary problems for states.
4. The Big Hammer (a new Winterism) is the demise of the Government-backed Ponzi schemes. That would be all the unsustainable and harmful QEs, bailouts, and Government artificial supports enabled by the ability to borrow a trillion and a half a year (for next to nothing) on top of a total debt that is closing in on 100% debt-to-GDP. This one is a function of pure mathematics.
First, China holds 20 per cent of the marketable Treasuries. They had a diminished appetite even before their export slowdown. Now China is running trade deficits and simply doesn’t have the means to recycle dollars and finance runaway western government debt.
Second, Japan and the oil producers in the Middle East hold 25 per cent of U.S. government debt. With other challenges afoot, those sources don’t have the ability to float the U.S. debt Ponzi scheme, as well as all of the sick PIGGS of Europe (Irish and Portuguese debt trap yields continue higher), along with their own needs. My Wall Street Examiner colleague Lee Adler has a rundown of the shorter-term Treasury picture.
With governance in the U.S. engaged in complete decisional paralysis and ruled by impostors, nothing will be done about the fiscal train wreck. Tinkering at the margin will have little impact. So that leaves the Fed virtually alone to deal with the onslaught. QE as a working concept is both an absolute necessity and an absolute impossibility. A failure to check inflation causes drivers (items nos. 1 through 3 above) to continue unabated.
The Fed has bought 70 per cent of all new supply coming to the Treasury market. Fail to monetise the debt and that leaves an artificial prop missing in the debt-buyer Ponzi scheme. In fact, at this point, it doesn’t really matter what the Fed does. Everything it does will be prove to be harmful. Late last week — no doubt in response to corporate phone calls on the profit-squeeze fiasco — the Fed rolled out some hawks (Bullard, Fisher and Plosser for some “tough talk.” Plosser, a voting member, says he will not only vote against QE but is in favour of a rate hike on April 27. Still, the commodity markets and other price indicators are on their own fast-paced schedule, having largely ignored the Pinocchios.
The conclusion of this report and the Actionable trade is available in the current Russ Winter’s Actionable.